Durable Goods, Price Indexes, and Monetary Policy

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Abstract

The dissertation studies the relationship among durable goods, price indexes and
monetary policy in two sticky-price models with durable goods. One is a one-sector
model with only durable goods and the other is a two-sector model with durable and
non-durable goods.
In the models with durable goods, the COLI (Cost of Living Index) and the PPI
(Producer Price Index) identical to the CPI (Consumer Price Index) measured by the
acquisitions approach are distinguished, and the COLI/PPI ratio plays an important rule
in monetary policy transmission. The welfare function based on the household utility can
be represented by a quadratic function of the quasi-differenced durables-stock gaps and
the PPI inflation rates. In the one-sector model, the optimal policy maximizing welfare is
to keep the (acquisition) price and the output gap at a constant rate which does not
depend on the durability of consumption goods. In the two-sector model with sticky
prices, the central bank has only one policy instrument, so it cannot cope with distortions
in both sectors. Simulation results show that the PPI is an adequate price index for
monetary policy and that a policy of targeting core inflation constructed by putting more
weight on prices in the sector producing more durable goods is near optimal.